Chapter Four

Accounting for Cash:

Nature of cash
Characteristics of Cash
Methods of Controlling Cash
Checking account
The petty cash fund
The voucher system
Cash short and over
 Accounting for Cash
Cash: is a medium of exchange that a bank
accepts for deposit and used immediately.
Cash is high in value, but light in weight and small
in bulk-hence a fortune can be transported in a
briefcase.
The risk of fraud and related theft of cash are
increased by the fact that currency bears as
identifying data which can prove legal ownership.
Cash includes coins, paper money, certain
deposited, negotiable instruments such as checks,
bank drafts and money orders and amounts in
checking and saving accounts.
 Characteristics of Cash
The following are some of the characteristics of cash:-
Cash is used as medium of exchange.
The most liquid of all asset.
 Easily cancelled and transported.
Readily convertible in any other assets.
 It is highly desired by everybody.
Cash is used to measure the value of other assets
Cash is mostly exposed to embezzlements
 Internal Control of Cash

 The need to safeguard cash is crucial in most

businesses because cash is mostly exposed to
embezzlement.
 Firms address this problem through the internal control
system.
 Internal control is especially needed to prevent fraud
and theft relating to cash transaction.
 An internal control system is a set of policies and
procedures designed to protect assets, provide
accurate accounting records and evaluate
performances.
 A sound internal control system for cash increases
the likely hood that the reported values for cash are
accurate.
Internal control for cash should include the following procedures:

a) The individuals who receive cash should not

also disburse (pay) cash.
b) The individuals who handle cash should not
access accounting records.
c) Cash receipts are immediately recorded and
deposited and are not used directly to make
payments.
d) Disbursements are made by serially numbered
checks, only upon proper authorization by
someone other than the person writing the check
e) Bank accounts are reconciled monthly.
Methods of Controlling Cash
 The bank checking account
 The petty cash fund
 The voucher system
Control of cash through bank account or the Bank
Checking Account
Bank accounts are one of the most important means of
controlling cash that provide several advantages such
as:
- Cash is physically protected by the bank,
- A separate record of cash is maintained by the bank,
- And customers may remit payments directly to the
bank.
 Cont…d
 A checking account (a bank account) is a
money balance maintained in the bank that is
subject to withdrawal by the depositor or owner
of the money, on demand.
 It is a record set up by a bank for a customer.
 It permits this customer to deposit money for
safeguarding and cheek withdrawals.
 Cont.…d
 To provide depositor’s with an accurate records
of depositor funds (cash) received and disbursed,
a bank uses the following business documents
(forms used) with a bank account:
a)Signature card
 It is a form signed by all persons authorized to
write checks on the account to limit access to a
bank account.
 Bank employees use to verify signatures on
checks.
 b)Deposit ticket or deposit slips
It is a form provided by bank on which the depositor lists all
the money and checks to be deposited.
It indicates the depositor’s name and account number and
summarizes the amount deposited.
The bank gives the customer a copy of a deposit ticket or a
deposit receipt as proof of the deposit.
It may be prepared in duplicate, in which case the copy is
stamped or initialled by the bank’s teller and given to the
depositor as a receipt.
It serve as a proof of the deposit
 Cont.…d
C. Check: A check is a written instrument signed by the
depositor ordering the bank to pay a certain sum of many
to the order of a designated person.
There are three parties to a check:
[Link] maker(drawer or depositors), the person (or
business) who writes or signs a cheek.
[Link] payee -the person (or business) to whom a cheek is
made payable-who is the recipient.
[Link] drawee-the bank on which the check is drawn.
If a company uses a bank account, monthly statements are
received from the bank showing beginning and ending
balances and transactions occurring during the month
including checks paid, deposits received, and service
charges.
These monthly statements (reports) received from the bank
are called bank statements.
Bank statements generally are accompanied by checks
paid and charged to the accounts during the month, debit
and credited memos, which inform the company about
changes in the cash accounts.
For a bank, the depositor’s cash balance is a liability, the
amount the bank owes to the firm. Therefore, a debit memo
describes the amount and nature of decrease is the
company’s cash accounts.
A credits memo indicates an increase in the cash balance of
the depositor that it has with the bank.
 Bank Statements
Bank statement is a monthly report showing the bank’s
record of the checking account.

The bank statement provides the following information

about customers’ cash accounts:

[Link] balance at the beginning of the month.

2. Additions in the form of deposits and credit memos.

3. Deductions in the form of checks and debit memos.

4. The final balance at the end of the month.

Reconciliation of Bank and Book Cash Balances
 Monthly reconciling of the bank balance with the
depositor’s cash accounts balance is essential cash
control procedure.
 To reconcile a bank statement means to verify that the
bank balance and the accounting records of the
depositor are consistent. B/s the books(ledger) and the
bank statement may show different amounts but both
are correct.
Generally, the difference may arise from two broad reasons:
I. A time lag in recording certain transactions either by the
depositor or the bank
II. Error in recording transactions made by either the depositor or the
bank
Among the factors causing the bank statement balance to differ
from the depositor’s book balance are:
i) Items recorded by the company (depositor) but not yet
recorded by the bank:
[Link] cheeks: check written by the depositor,
deducted/appear in the check book but not in the statement or
 checks which have been issued by the co. and recoded on its
books but not yet have been paid by its bank (not yet presented
to the bank for payment).
Checks which have been issued by the company but were
not presented or cleared before the issuance of bank
statement.
2) Deposit in transit-(also called outstanding deposits):
these are deposits made and recorded by the depositor but
not recorded on the bank statement.

This is the case most of the time for deposit made at end of
the month and processed by the bank after the monthly
statement has been prepared.

E.g. Night deposits, deposits by mail etc.

 Deposits which have been sent by the company to the
bank but have not been received by the bank at proper time
before the issuance of bank statement.
 Cont.…d
ii) Items recorded by the bank but not yet recorded by the
companies (the depositors):
a)Note collected by bank – If the bank collects a note
receivable on behalf of the depositor, it credits the
depositor’s account and issues a credit memo for the
depositor.
some banks collect notes or securities for the depositor
and enter the amounts directly in the depositor’s account.
Such collections appear on the bank statement but not in the
check book.
b) Service charge- bank usually charges a fee for processing
the depositor’s transactions. The depositor bears the amount of
the service charge from the bank statement and usually
accumulates in miscellaneous expenses account.
The amount of this charge is deducted by the bank from
bank balance and debit memo is issued for the depositor
c) Interest revenue on bank account- bank pay interest and
depositor earns from the bank statement.
d) NSF (Not Sufficient Fund)-checks received from customers
to understand how to handle the NSF checks.
These are the checks deposited by the company in bank account
but the bank is unable to receive payment on those checks due
to insufficient funds in the payer's account.
 Cont.…d
iii) Errors in recording transactions by either the
company or the bank:

Credit and debit memo

CM (credit memo) increases or credits to the account, such
as notes or accounts left with the bank for collection.

DM (debit memo) Decrease or debits to the account, such

NSF checks, automated teller machine withdrawals(ATM),
and service charges.
 Bank Reconciliation
 It is a schedule the company (depositor) prepares to
reconcile, or explain, the difference between the
cash balance shown on the bank statement and the
cash balance on the company’s books (ledger) or
 The process of bringing the difference between the
balance of a checking account according to the
depositor’s records and the balance reported on the
bank statement in to agreement is called Bank
reconciliation.
 Cont.…d
It is a listing of the items and amounts that cause
the difference.
It is prepared by the depositor to determine the
company’s actual cash balance that should be
depicted in the ledger (and then in the balance
sheet).
 Cont.…d

Bank reconciliation is divided in to two main sections:-

One section begins with the balance shown on the bank
statement and ends with adjusted balance, and
 The second section begins with the company’s books and
ends with the adjusted balance.
The two sections adjusted balance should be the same
(equal).
Note: Remember that all items shown on the bank reconciliation
as adjustments of the book (ledger) balance will require journal
entries to adjust the cash account; items appearing on the Bank
balance side don’t requires adjusting entries by the depositor.
 Bank Reconciliation
Name of The Company
Bank Reconciliation Statement
Date: Usually Month of Reconciliation
Balance as per Bank Statement ....................................................... xxx
Add: Deposit in Transit .................................................................. xxx
Bank Errors ............................................................................ xxx xxx
Sub-Total ......................................................................................... xxx
Less: Outstanding Checks............................................................... xxx
Bank Errors ............................................................................ xxx (xxx)
Adjusted Cash Balance.................................................................... xxx
Balance per Depositor Records ....................................................... xxx
Add: Notes And Interest Collected By Bank.................................. xxx
Depositor Error ....................................................................... xxx xxx
Sub Total ......................................................................................... xxx
Less: NSF (Not Sufficient Fund) .................................................... xxx
Bank Service Charge .............................................................. xxx
Depositor Errors ..................................................................... xxx (xxx)
Adjusted Cash Balance.................................................................... xxx
 Cont..
• the bank statement for Power Networking Company
shown above. This bank statement shows a balance of
$3,359.78 as of July 31. The cash balance in Power
Networking’s ledger on the same date is $2,549.99.
Using the preceding steps, the following reconciling
items were identified:
• Step 2: Deposit of July 31, not recorded on bank
statement: $816.20 Check No. 812 $1,061.0
• Step 3: Outstanding checks: 0
Check No. 878 435.39
Check No. 883
48.60
Total $1,544.9
• Step 6: Note receivable of $400 plus interest of $8 9
collected by bank not recorded in the journal as
indicated by a credit memo of $408.
 Cont..
• Step 6: Note receivable of $400 plus interest of $8
collected by bank not recorded in the journal as
indicated by a credit memo of $408.
• Check from customer (Thomas Ivey) for $300
returned by bank because of insufficient funds
(NSF) as indicated by a debit memo of $300.00.
• Bank service charges of $18, not recorded in the
journal as indicated by a debit memo of $18.00.
• In addition, an error of $9 was discovered. This
error occurred when Check No. 879 for $732.26 to
Taylor Co., on account, was recorded in the
company’s journal as $723.26.
 Cont..
Power Networking
Company
Bank Reconciliation
July 31, 2012
 Cont..
• The journal entries for Power Networking, based on the
bank reconciliation shown above, are as follows:
 Example
The following data were gathered to use in reconciling the
bank account of Photo Op:
Balance per bank . . . . . . . . . . . . . . . . . . . . . . . ... $14,500
Balance per company records .. . . . . . . . . . . . . . ..13,875
Bank service charges . . . . . . . . . . . . . . . . . . . . . . ... 75
Deposit in transit . . . . . . . . . . . . . . . . . . . . . … 3,750
NSF check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. 800
Outstanding checks . . . . . . . . . . . . . . . . . . . . . . . . . ..5,250
a. What is the adjusted balance on the bank reconciliation?
b. Journalize any necessary entries for Photo Op. based on
the bank reconciliation.
 Petty Cash Fund
A petty cash fund- is a fund established by a business for
making small payments of cash.
There are three steps in the operation of a petty cash fund:
1) Established the fund.
2) Making payments(disbursements)from the fund.
3) Reimbursing (replenishing) the fund.
Establishing the Fund
Two steps involved in establishing the fund.
1) Appointing a petty cash custodian (the person who is
responsible for the operation of the fund) and
 2) Determining the size of the fund and establishing
When the fund is established, check payables to the
custodian is issued for the stipulated amounts. And the
check is cashed and the proceeds are placed under control
of the custodian in the petty cash box.
Journal entry to record the establishment will be
petty cash $xxx
cash( in bank) $xxx
Example: To illustrate, assume that a petty cash fund of
$500 is established on August 1.
The entry to record this transaction is as follows:
August. 1
petty cash $500
cash (in bank ) $500
Cont. …d
At the end of August, the petty cash receipts indicate
expenditures for the following items:
office supplies $380

postage 22
Store supplies 35
Miscellaneous expense 30
Total $467
The entry to replenish the petty cash fund on August 31 is
as follows:
Aug. 31, Office supplies $402
store Supplies 35
Miscellaneous expense 30
Cash in bank $467
 Cash short and over
 The amount of cash actually received during a day
often does not agree with the record of cash receipt.
 Whenever there is a difference between the record and
the actual cash and no error can be found in the
record, it must be assumed that the mistake occurred in
making changes.
 Cont.…d
The cash shortage or overage is recorded in an
account entitled cash short and over.
If there is a debit balance in the cash short and
over account at the end of the fiscal period, it is an
expense and may be included in ‘‘Miscellaneous
Administrative Expense’’ on the income
statement.
 If there is a credit balance in the cash short and
over account at the end of the fiscal period, it is
revenue and may be listed in the “Other
Income” section.
 Cont...d
If the actual cash received from sales is less than the
recorded amount, cash short and over account is
debited, where as if the actual cash is greater than the
recorded the cash short and over account is credited
for the difference.
Illustration
Assume that if a cash register’s record shows a birr 550
balance, but the actual cash count is $555.
Required: Record the necessary journal entry
Solution
Cash in bank --------------------555
Sales -----------------------------550
Cash short & over ----------------5
(To record cash sales & cash overage)
 Cont….d

Illustration
Assume that if a cash register record shows $625
cash balance but the actual cash count is birr 621.
Required: Record the necessary journal entry
Solution
Cash in bank --------------------621
Cash over & short --------------- 4
Sales -----------------------------625
(To record cash sales & cash shortage)